Finance Bill

1.Summary

1.1This submission argues for an amendment to the Finance Bill 2015 to introduce public country-by-country reporting in the UK.

1.2Support for greater action to tackle tax avoidance is strong:

1.2.185% of the public say that tax avoidance by large companies is morally wrong, even if it is legal
[1]
. This holds across the political spectrum.

1.2.2Only 20% of people believe political parties have gone far enough in their promises to tackle tax avoidance.

1.2.373% want the Government to legislate to discourage large UK companies from avoiding tax in developing countries.

1.2.4Nearly 9 in 10 small and medium sized businesses back the tackling of aggressive tax avoidance
[2]
.

1.3Support for public country-by-country reporting is widespread:

1.3.1It was one of the key asks of the Tax Dodging Bill campaign. It was supported by over 80,000 people, and 25 UK and international NGOs including ActionAid, Oxfam, Church Action on Poverty, The Equality Trust, The Global Poverty Project, Jubilee Debt Campaign, the Methodist Tax Justice Network, the High Pay Centre, Bond and CAFOD.

1.3.2It is supported by the Financial Transparency Coalition, which is a global network of civil society, governments and experts spanning five continents. They seek to promote a transparent, accountable and sustainable financial system that works for everyone.

1.3.3A PwC study for the European Commission concluded that public country-by-country reporting that will be carried out by some companies under the EU Capital Requirements Directive would, if anything, be positive
[3]
.

1.3.4The European Parliament has voted in favour of public country-by-country reporting
[4]
.

1.4We consider that while this Bill takes some small steps forward in tackling tax avoidance, it will not have a significant impact for developing countries. It misses the opportunity to tackle tax avoidance in developing countries, which the IMF has recently calculated costs them $212 billion a year.
[5]

1.5The suggested amendment presented in section 3 of this submission has a number of advantages:

1.5.1It would give governments, civil society, parliamentarians, investors and others much greater ability to tackle tax avoidance and corruption; and to assess the effectiveness of measures designed to address tax avoidance and evasion.

1.5.2It would guarantee that developing country governments and citizens would be able to see what taxes companies pay in their countries, and the economic activity those taxes are based on.

1.5.3It would enable the UK Government to show leadership, and to set the standards for reporting rather than following others.

1.5.4Making reports public would represent a cost saving in comparison to the suggested OECD process.

1.5.5UK legislation would greatly increase the likelihood of a multilateral agreement.

1.6We cannot foresee any major disadvantages to the amendment. We have engaged in consultations with FTSE 100 companies on this issue. The responses have convinced us that there would be a minority of companies who might resist the changes. The majority of companies can see the benefits of increased transparency and would appear likely to not strongly object to legislation.

2.Introduction

2.1Christian Aid is a Christian organisation that insists the world can and must be swiftly changed to one where everyone can live a full life, free from poverty. We work globally for profound change that eradicates the causes of poverty, striving to achieve equality, dignity and freedom for all, regardless of faith or nationality. We are part of a wider movement for social justice. We provide urgent, practical and effective assistance where need is great, tackling the effects of poverty as well as its root causes.

2.2The Government has outlined one of the key goals of this Bill as being to tackle tax avoidance, evasion, non-compliance and imbalances in the tax system.
[6]
The Bill includes a number of measures designed to tackle tax avoidance. For example, clause 36, new sections 455B, 455C, 455D, 698B, 698C and 698D.

2.3Christian Aid has been focussing on the impact of tax avoidance on international development for nearly ten years. We work in this area for a number of reasons. For example:

2.3.1The IMF recently calculated that developing countries are losing around $212 billion a year to tax avoidance by companies. This is substantially more than they receive in aid
[7]
.

2.3.2The OECD has estimated that tax havens may be costing developing countries a sum of up to three times the global aid budget
[8]
.

2.3.3The value of capital that flows out of developing countries is huge, estimated at nearly $1trillion a year
[9]
and means that Africa is actually a net creditor to the world
[10]
.

2.3.4As stressed by the UN’s Agenda 2030 for Sustainable Development, taxes are central to achieving the sustainable development goals. They provide a domestic funding stream for countries to invest in their own development, allowing them to move beyond aid reliance while building accountability with their citizens. Many companies operating in developing countries play a crucial role in their development while paying the taxes they owe. But some multinational companies take advantage of loopholes in global rules and secrecy created by offshore tax havens to avoid paying developing countries the taxes they owe. For example, they exploit loopholes in tax treaties, shift profits to tax havens, and keep their money in a complex web of secret ownership. This hampers efforts to create sustainable development and achieve gender equality.
[11]

2.4While this Bill does make some small steps forward in tackling tax avoidance, it will not have a significant impact for developing countries, which suffer disproportionately from corporate tax avoidance. The Bill misses an opportunity in introducing greater financial transparency, which would benefit developing countries.

2.5Our submission will focus on one amendment which we believe would provide a step change in tackling corporate tax avoidance for the benefit of developing countries. Section 3 of our submission will outline our proposed amendment, section 4 will provide explanatory notes, and section 5 will outline reasons why the amendment is both needed to tackle corporate tax avoidance in developing countries, and wanted by the UK public.

3.Our suggested amendment

Page 48, line 12, at end insert new clause 37(A):

The following shall be added as a new clause 404 to the Companies Act 2006.

a.Any large company that includes within its group accounts a subsidiary, branch, joint venture or affiliate that is not required to report its taxable income to HM Revenue & Customs shall be required to comply with the requirements of this section whether those group accounts are prepared as IAS Group Accounts or Companies Act Group Accounts.

b.Any large company registered in the UK that is the subsidiary of a parent company located in another jurisdiction shall be subject to the requirements of this section and shall publish the information that it requires if:

i.It is the ultimate parent company of the UK subsidiaries of the group of which it is a part, or;

ii.It is deemed by the Secretary of State for Business, Innovation and Skills (or such person as they shall nominate) to be the UK representative member of the group of which it is a part for the purposes of this section, and;

iii.The group of which it is a part does not publish on public record the information required by this section in the accounts of its ultimate parent company.

c.A company required to comply with this section shall publish in its group accounts all that information that would have to be prepared if the group were to comply with all the requirements of the Organisation for Economic Cooperation and Development's current or last recommended Template for Country-by-Country Reporting and shall publish that information for each jurisdiction in which it shall trade, without exception. If the Organisation for Economic Cooperation and Development country-by-country reporting template is modified to reduce required disclosure than those changes shall not apply for the purposes of this section and the previous template shall be considered to be current.

d.For the purposes of this section a company whose results are included in group accounts trades in a jurisdiction if it has:

i.Sales or other income that would be taxable if received in the United Kingdom, whether intra-group or third party, recorded in that jurisdiction and no other;

ii.Employees in that jurisdiction;

iii.A permanent establishment for taxation purposes in that jurisdiction.

e.Any company required to comply with this section shall in addition to publishing the information noted in subsection (c) also publish for each jurisdiction for which disclosure is made the following additional information:

i.The total remuneration paid, including salaries and bonuses but excluding employer pension contributions, employer social security and payroll costs and the costs of benefits in kind, to those persons included in the employee headcount for a jurisdiction

iii.Intra-group interest charges made to and from the jurisdiction, each to be disclosed separately

iv.Intra-group hedging income and expenditure arising within the jurisdiction, each to be disclosed separately

f.A company required to comply with this section shall publish the information required by it whether or not that information is required by law to be submitted by it to HM Revenue & Customs

4.Notes to the suggested amendment

4.1The overall aim of the amendment is to enact the requirement that country-by-country reporting be placed on public record by multinational companies required to prepare group accounts in the UK and the companies that are exempted from that requirement but which are, nonetheless, the parent of UK group of companies or are nominated as such where the parent company is overseas. This requirement is to prevent unfair competition on disclosure.

4.2The amendment reflects the style of the Companies Act 2006 which does not specify the detailed content of accounts but does instead rely on secondary regulations to achieve that goal or on external regulation when that can achieve the same effect e.g. by adopting International Financial Reporting Standard as a disclosure standard (which form the basis for what are called IAS Group Accounts in the Act). Since the OECD recommended a template format for country-by-country reporting in September 2014 and is putting in place regulation to ensure compliance with its expectations it would appear most appropriate at present to adopt its approach to country-by-country reporting as the basis for UK public reporting. That way:

4.2.1Limited additional burdens are placed on most businesses;

4.2.2If the template is updated, so is the law;

4.2.3Detailed definitional rules can be determined by the work the OECD is doing.

4.2.4If the OECD abandons the country-by-country reporting requirement the last promulgated version remains in operation force the purpose of this law.

4.3Section 404 Companies Act 2006 defines the content of Companies Act Group Accounts. Companies may either prepare group accounts as Companies Act Group Accounts or IAS Group Accounts. Since the OECD country-by-country reporting template is not part of IAS the additional requirement has to be included in Section 404 relating to Companies Act Group Accounts but is written to apply to accounts in both possible formats, as is necessary.

4.4Section (a) is drafted to ensure that the requirement to disclose applies if any organisation reflected in the group accounts has to report its tax affairs to an authority outside the UK. This is a more objective and easier test to enforce than seeking to define whether or not a company has a place of trade outside the UK.

4.5Section (b) extends the requirement of the section to foreign owned companies with subsidiaries in the UK if they do not report this information in their parent jurisdiction, so ensuring a level playing field for reporting purposes;

4.6Section (c) requires data in the accounts without exception if the conditions of section (b) are met and that data must be made available for all jurisdictions in which the group trades without exception. The OECD country-by-country reporting template also requires this.

4.7Section (d) makes clear how the location of a trade is identified for these purposes. Detail is added by the OECD’s regulations, which can be relied on for this purpose.

4.8The OECD template is good but does omit some useful information that is really required for public country-by-country reporting but which may not be needed for tax risk assessment, which is the OECD’s sole focus. Section (e) makes good these deficiencies:

4.8.1Firstly, data on the cost of employing staff in a jurisdiction is added to the data on the number engaged. This was proposed as part of the OECD template and omitted because it was not considered necessary for tax purposes. It is however essential for civil society purposes where wage differentials between jurisdictions clearly matter and so this data is added to required disclosure.

4.8.2If transfer mispricing is to be properly appraised it is not just important that intra-group sales information be available, but that data on the other side of that equation i.e. intra-group purchases, also be known. That is why data on this is requested because with this information being made available the flow of funds within a group of companies can be traced.

4.8.3As recent disclosures from Luxembourg have shown, intra-group interest payments are a major component in international profit shifting. This means that their separate disclosure under country-by-country reporting is vital if tax abuse is to be identified, and so discouraged and even stopped.

4.8.4Little attention has been given to intra-group hedging as a mechanism to shift profits as yet, but such arrangements can definitely be used for this purpose and if this data was not disclosed they would become the favoured mechanism for such profit shifting.

4.9Section (f) makes clear that this disclosure is not dependent upon tax rules, which would be inappropriate.

5.Why is this amendment both needed and wanted?

5.1Multinational companies are able to exploitloopholes in domestic and international tax laws to shift profits from one country to the next, often through jurisdictions with very low tax rates. The end goal is to reduce or eliminate the tax they pay to governments. This behaviour has a particularly devastating effect on developing countries.An example of it can be seen in the recent ‘LuxLeaks’ revelations
[12]
– where leaked documents revealed secret tax deals arranged between hundreds of different companies (including many UK-based companies) and the European state of Luxembourg.

5.2Although multinational companies do report on their global profits, revenue, taxes paid and numbers of employees, the data provided is for the operations of all their subsidiaries bundled together. This prevents a clear understanding of a corporation’s operations in any specific country. It also prevents a clear understanding of how changes in government policy affect corporations’ decisions and activities. Public country-by-country reporting would require multinational companies to publish this information for each country where they operate. This would give governments, civil society and investors much greater ability to spot irregular activity that could present a risk and/or should be investigated further. For example, cases of corruption and bribery. It would also give governments, civil society, parliamentarians, journalists and others the data to be able to monitor the impact and effectiveness of government policy, including assessing the success of recent measures to address tax avoidance and evasion.

5.3Under the proposals of the OECD Base Erosion and Profit Shifting (BEPS) project, country-by-country reporting will be a requirement from 2016 for all multinational companies with a group revenue greater than €750 million. In September 2014, the UK Government announced its commitment to implementing country-by-country reporting in accordance with the proposed OECD guidance. Clause 122 of Finance (No. 2) Act 2015 provides HM treasury with the power to make the required regulations.

5.4However, while the proposals for country-by-country reporting under the OECD BEPS project are welcome, we do not believe that they go far enough. To ensure that such reporting can achieve the maximum beneficial impact, we would like to see the UK commit to regulations that require UK-based companies to make public their country-by-country reports. This would have the following advantages:

5.4.1By publishing the data it will be exposed to scrutiny by a larger number of stakeholders, including civil society. This makes it more likely that potential misalignment between value creation, profits declared and tax paid can be identified and examined. In addition this data will provide important information to identify the overall effectiveness of other actions under BEPS and will help to identify broader problems with particular jurisdictions or commercial sectors.

5.4.2Potential investors would be made more aware of exposure to ‘tax risk’ and would be provided with a range of useful data that would guide better investment decisions.

5.4.3The proposed system of ‘transmission’ of the information in the country-by-country reports requires that they are developed in the company’s home country and then distributed to relevant governments in countries of operation via existing international agreements. This means that some authorities in countries with a significant interest in the reports may not receive them, and developing countries will be disproportionately affected. Making the reports public ensures that developing country governments, and their citizens, will be able to access the information.

5.4.4The proposed conditions on ‘appropriate use’ in the OECD guidelines restrict the use of country-by-country reporting data to tax-related risk only. This may mean that opportunities to tackle corruption are missed. This risk will be avoided if the information is made public.

5.4.5The OECD BEPS process is proposing a number of potentially significant changes to tax policies. Public country-by-country data will enables parliamentarians and citizens to fully assess the impacts of these changes.

5.5Recent surveys from PwC
[13]
and comments from KPMG
[14]
support the view that public country-by-country reporting will happen, and it is a case of ‘when’ rather than ‘if’. The UK Government making country-by-country reporting data public will enable it to show leadership, and to set the standards for the reporting rather than following others.

5.6If the UK Government adopts public country-by-country reporting in line with this amendment, this will increase the chances that other countries will follow suit.

5.7We do not believe that there are any significant disadvantages to making country-by-country reporting data public on a unilateral basis.

5.8Large financial sector companies are already required to carry out public country-by-country reporting under the EU Capital Requirements Directive. A PwC study for the European Commission concluded that the economic impact of this would, if anything, be positive
[15]
.

5.9The European Parliament has voted to support public country-by-country reporting for all sectors. Its position is now awaiting trialogue negotiations.

5.10Christian Aid has engaged in consultations with FTSE 100 companies on this issue. The responses have convinced us that there would be a minority of resistance to the UK introducing legislation to make country-by-country reporting data public. The majority of companies can see the benefits of increased transparency and would not object strongly to legislation.

5.11Making the reports public would represent a cost saving for the Government in comparison to the suggested OECD process. Transparency would eliminate much of the costly bureaucracy required by the OECD process.

5.12UK legislation would greatly increase the likelihood of a multilateral agreement. For example, UK legislation to create a public register of beneficial ownership in the Small Business, Enterprise and Employment Act 2015 has led to the EU adopting higher EU-wide standards.

5.13Public country-by-country reporting in the UK was one of the key asks of the Tax Dodging Bill campaign. It was supported by over 80,000 people, and 25 UK and international NGOs including ActionAid, Oxfam, Church Action on Poverty, The Equality Trust, The Global Poverty Project, Jubilee Debt Campaign, the Methodist Tax Justice Network, the High Pay Centre, Bond and CAFOD.

5.14Public country-by-country reporting is supported by the Financial Transparency Coalition, which is a global network of civil society, governments and experts spanning five continents. They seek to promote a transparent, accountable and sustainable financial system that works for everyone.

5.1585% of the public say that tax avoidance by large companies is morally wrong, even if it is legal
[16]
. This holds across the political spectrum.

5.16Only 20% of people believe political parties have gone far enough in their promises to tackle tax avoidance.

5.1773% want the Government to legislate to discourage large UK companies from avoiding tax in developing countries.

5.18Nearly 9 in 10 small and medium sized businesses back the tackling of aggressive tax avoidance
[17]
.